Self-Directed IRA | American IRA

Owners of Self-Directed IRAs Benefit from Japanese Pension Fund Shift to Alternative Asset Classes

October 19, 2018/in Blog, Self-Directed IRA /by Jim Hitt

Internationally, the ‘smart money’ is starting to move more toward alternative asset classes, and away from traditional fixed income assets. That means that IRA investors are in the catbird’s seat, as institutional money begins to flow in their Self-Directed IRAs direction.

A new report from J.P. Morgan indicates that the traditionally conservative, staid pension funds in Japan have allocated a whopping 17.1 percent to alternative investment classes as of last March (2018), up from just 11.4 percent as of just five years ago. The survey also found that a majority of these pension funds – 60 percent – intended to increase their exposure to alternative investment classes over the next year.

Meanwhile, Japanese pension funds dumped Japanese government bonds – reducing their exposure to 21.7 percent, the lowest allocation to government debt in the last 11 years – going back to the beginning of the survey.

Alternative Assets Going Mainstream in Japan

It is no mystery why: Years of government policy promoting growth at the risk of inflation and at the expense of savers resulted in the 10-year government issue yielding just 0.02 percent!

“We expect to see investors continue to ‘push the envelope’ on alternatives to boost return and increase portfolio resilience,” said Akira Kunikyo, an institutional investment specialist with J.P. Morgan to editors of the Financial Times.

Those are precisely the two biggest reasons individual investors should consider increasing their own exposure to alternative asset classes within their retirement portfolios.

These accounts, including Self-Directed IRAs, 401(K)s, Self-Directed SEP IRAs, Self-Directed SIMPLE IRAs and even Self-Directed CESAs (Coverdell Education Savings Accounts) and Self-Directed HSAs (health savings accounts) allow individual investors to direct their own retirement assets into alternative asset classes just as large institutions do. Examples of alternative asset classes include:

Direct ownership of real estate
REITs
Private equity
Venture capital
Hard money lending
Oil and gas
Limited partnerships and MLPs
Tax liens and certificates
Land banking
Private lending
Hedge funds

“Alternative assets have truly become a mainstream asset for Japanese pension funds, adds Kunikyo.

Often, these alternative asset classes can be very illiquid. That is a feature, not a bug, as Self-Directed IRA investors usually have very long-time horizons. There is simply no need to give up expected return in exchange for liquidity they do not need. When you have years or decades before you are likely to need to access the money, an illiquid 6 percent is better than a liquid 2 percent.

The long-time horizons of Self-Directed IRAs for most investors make them ideal homes for alternative asset classes: There is lots of time for compounding to take place, relatively unmolested by income taxes, dividend taxes and capital gains on any trades. Rental income in a Self-Directed Roth IRA, for example, is tax-free, provided the assets have been in the Self-Directed Roth IRA for at least five years. And even in traditional Self-Directed IRAs, taxes on growth and income are deferred until you begin taking money out of the account, generally in retirement. (There may be some exposure to unrelated debt income tax if you borrow money within your retirement account to invest with, depending on the circumstances.)

Interested in learning more about Self-Directed IRAs? Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation. Download our free guides or visit us online at www.AmericanIRA.com.

Four Common Retirement Fears – And How Self-Directed IRAs Can Help

October 17, 2018/in Blog, Self-Directed IRA /by Jim Hitt

Many Americans are feeling insecure about retirement. And it is no wonder. The days of staying with one company for forty-five years and then enjoying a comfortable retirement thanks to a generous pension are no longer the norm. Plus, everyone hears those rumors—true or not—that Social Security might not be around (at least in its present form) when it is their turn to collect from it. A Self-Directed IRA may be able to help.

Add to those worries an unpredictable stock market and “safe” investments like treasury bills and CDs that do not yield enough to keep up with moderate inflation, and it is easy to understand why there’s little peace of mind for future retirees.

But there is hope for safeguarding your plans for the future. It is called a Self-Directed IRA, and it gives retirement investors more options—private stock, real estate, precious metals, and more—from which to diversify and gain some sense of security.

Take a look at how Self-Directed IRAs can help you and other investors overcome many of those common fears about retirement:

Inflation will devastate my savings

Every one of us has experienced inflation. Here’s an example: Five years ago, you set aside $18,000 in your savings account for your next car. Today, that same car costs $21,000, while your money has “grown” to $18,050! Your dollars are less valuable than they were five years ago, and your savings could not keep up with inflation.

Traditional IRA investments such as stock, bonds, and CDs usually lose money when inflation is high. Conversely, physical assets like real estate and gold will typically maintain their value during inflationary times. Diversifying into these physical assets through a Self-Directed IRA can help you protect your retirement funds from inflation.

The stock market will collapse, and I will lose everything

Many investors still feel the pain of watching their portfolios cut in half during the stock market collapse of 2008. The fear of it happening again is magnified because now they are ten years closer to retirement. And while 2008 was an extreme case, downturns in the market occur regularly, and it is next to impossible to predict how any future corrections will impact your portfolio.

Self-Directed IRAs give you more investment options to expand your portfolio into different asset groups. This diversified investment tactic can protect your investments by reducing risk—some of your assets may decrease in value while others remain stable or increase. That is why it is important to have asset classes that are complimentary. For instance, gold compliments stocks because there is very little correlation between the two. In other words, when stocks are struggling, gold is shining.

I will not have sufficient income in retirement

After you retire, you will be counting on your savings to generate income for you. Many retirees turn to bonds and CDs because they believe these are low-risk alternatives. Unfortunately, they do not produce enough income to keep up with inflation, so these investors end up trading one risk for another.

One investment that’s available with a Self-Directed IRA, real estate, is an excellent option for generating streams of income. Investment properties can be one good option for post-retirement income streams. Investment properties can create a reliable rental income that is typically higher than those you would earn from the low-risk choices. And unlike stocks, you need not be concerned with market volatility.

I have trouble understanding my investments

Stocks, bonds, and other financial assets are complex, and they can be difficult for the average retirement investor to comprehend. Just tune in to one of the financial channels and listen to the experts. Even they cannot agree on which stock is your best investment choice.

Physical assets, like real estate and precious metals, are easier to understand. Everyone has seen, touched, and experienced these during their lifetime. And with a Self-Directed IRA, you can shift some of your funds into these assets to give yourself more confidence in your overall portfolio.

At American IRA, we believe that a diversified Self-Directed IRA is the best vehicle for growing your retirement account. And we have the experience to handle your transactions, no matter which of the various options you choose to utilize.

How to Take a Distribution from a Self-Directed IRA Owned Single-Member LLC

October 15, 2018/in Blog, Self-Directed IRA /by Jim Hitt

If you have a Self-Directed IRA retirement account that owns a single-member limited liability corporation (LLC), you probably understand that when you used your retirement funds to purchase the LLC, the LLC became a separate entity. You may purchase assets and make investments through the LLC, and you might even have check-writing privileges.

One thing you cannot do, however, is to take a distribution from your LLC. Although a Self-Directed IRA owned single-member LLC can be used as its own investment vehicle, IRA distribution rules are still in effect, and any distributions must come from the IRA and not the LLC. Here is a brief review of distributions. In other words, what happens when you take money from your Self-Directed IRA?

What is a distribution?

A distribution takes place when funds are removed from a Self-Directed IRA and paid to the IRA’s owner. The IRA owner is then required to declare the distribution amount as income and pay taxes on it. The funds that are removed from the Self-Directed IRA lose their tax-deferred protection and are treated as income. The money is no longer subject to IRA rules, and the owner is free of any restrictions on what he or she may and may not do with it.

Also keep in mind that if you have reached the age of 70 ½, you must take into account that you will have required minimum distribution (RMD) rules to consider. The rules state that you must begin liquidating your tax-deferred plans when you reach that age. Once again, this does not change the distribution rules. Your RMDs must come from your Self-Directed IRA and may not be taken directly from your LLC.

How do you take a distribution if you have an LLC?

Taking a distribution can be confusing, especially if you have only recently opened your Self-Directed IRA LLC. The LLC will require an extra step whenever you take a distribution. Here is an example to show you how it works:

In the following scenario, the owner of the Self-Directed IRA LLC wants to take a $20,000 distribution. Since most of the owner’s funds are in the LLC, there is not enough cash in the IRA to cover the distribution. Many Self-Directed IRA owners mistakenly believe they can take the distributions from the LLC. After all, that is where the funds are located.

But those funds must flow back to the Self-Directed IRA first, and then they can be distributed to the owner. Remember, you are the owner of the IRA, but the Self-Directed IRA owns the LLC. So, the LLC would need to send funds back to its owner, your IRA. As the manager of the LLC, you would send a $20,000 check to the IRA, after which you would request a distribution from the Self-Directed IRA’s administrator. The administrator processes the request, cuts a check for $20,000 to you personally, and issues a 1099 for the distribution amount.

You must declare the $20,000 as income for the year in which you took the distribution, and you must pay taxes on it by the following April 15th.

You cannot take a distribution from the LLC!

In summary, Self-Directed IRA owned single-member LLCs do not change the rules and requirements of distributions. As the manager of the LLC, you may not write yourself a check and call it a distribution. You, your IRA, and the LLC are three separate legal entities. Do not confuse yourself with your IRA. And do not confuse your Self-Directed IRA with the LLC!

Let us use our experience to help you

At American IRA, we work with Self-Directed IRAs every day. With our simplified process, you can quickly and easily take care of your investment transactions.

What to Know Before You Open a Self-Directed IRA

October 12, 2018/in Blog, Self-Directed IRA /by Jim Hitt

As equity prices soar – and arguably become more dangerous – more Americans are looking to diversify into other asset classes by opening a Self-Directed IRA. These are IRAs that enable them to think beyond Wall Street financial products like stocks, bonds and mutual funds and get into alternative asset classes like gold, silver, direct ownership of real estate, closely-held corporations, partnerships and LLCs.

There are loads of advantages to doing so: A Self-Directed IRA can help diversify your portfolio and may help protect you in the event of a stock market decline, a sudden increase in interest rates or bond yields, or a major spike in inflation that would devastate paper assets. But there are some things to understand before you make your first actual Self-Directed IRA transactions:

Your Self-Directed IRA cannot transact with certain family members.

You cannot use IRA funds to engage in self-dealing, nor to enrich certain immediate family members. Specifically, your Self-Directed IRA may not buy or borrow from, nor sell or lend to, yourself, your spouse, your descendants or ascendants or those of your spouse, an advisor who services your IRA account or provides advice on it in the role of a fiduciary, nor can you transact with any entities any of these individuals control.

If you do so, you will violate prohibited transaction rules, and the IRS may disallow the transaction and potentially revoke the tax-preferred status of the entire Self-Directed IRA. This would potentially result in a significant current-year income tax hit. It would also potentially expose you to penalties, if you are under age 59½.

You need a specialized third-party administrator or custodian. You cannot run a Self-Directed IRA on your own, because IRA rules prohibit you from taking direct personal possession of assets. You will need to partner with an independent firm to hold assets and conduct transactions for the Self-Directed IRA on your behalf.

Few traditional banks or Wall Street firms will do this for alternative asset classes. They do not get any revenue streams if your Self-Directed IRA buys a rental property down the block. Generally, you will need to enroll the services of a company like American IRA, which specializes in handling Self-Directed IRA assets, and executing, recording and reporting transactions in a way that is compliant with the law and with IRS regulations.

Additionally, while these companies do not provide individualized investment or tax advice, they may be able to identify potential compliance pitfalls such as prohibited transaction rules and obvious signs of potential fraud.

You can buy almost anything, but not

The Self-Directed IRA is a remarkably versatile vehicle. You can use the Self-Directed IRA structure to invest in nearly anything whether it is publicly traded or not. You can also use it to conduct transactions with nearly any private party, as long as they are not on the list of prohibited counterparties, above, or if doing so would violate U.S. sanctions against foreign governments and other entities.

The only things you cannot own within a Self-Directed IRA are life insurance contracts, collectibles, art, jewelry and gemstones, alcoholic beverages and certain forms of gold or bullion that is of insufficient or uncertain purity and provenance.

If you have any doubts about a possible investment, call us today at 866-7500-IRA (472) and speak with one of our compliance professionals. We cannot advise you on the suitability of the investment for your portfolio, but we can tell you if the investment may cause a compliance issue.

Do your due diligence. At American IRA, our clients are naturally attracted to alternative investments that are usually unregistered. This means that the investor is taking on much more of the burden for due diligence. There are often no financial statements vetted by a third party as there are with publicly-traded companies in the United States. It is up to you to secure financial statements and other material information and weigh their accuracy prior to investing.

Self-Directed IRA Prohibited Transactions – An Overview

October 5, 2018/in Blog, Self-Directed IRA /by Jim Hitt

Establishing a self-directed retirement account is easy. But if you are new to Self-Directed IRAs and other retirement accounts, it behooves you to understand what you can and cannot invest your Self-Directed IRA assets.

Self-Directed IRAs are very flexible. Investors are attracted to Self-Directed IRAs because they allow them to free themselves from the relatively modest returns available from Wall Street products and diversify into alternative asset classes such as direct ownership of real estate, oil and gas, private lending, gold and precious metals, and many others.

The law does not restrict Self-Directed IRA investors to stocks, bonds, mutual funds or any other conventional financial product. You can invest your Self-Directed IRA funds in just about anything you like, with just a few exceptions:

Life insurance (but annuities are ok).
Jewelry and gemstones.
Certain kinds of precious metal coin and bullion of uncertain or inadequate purity.
Art and collectibles.
Wine collections and other alcoholic beverages.

The Internal Revenue Code Sections 408 & 4975 prohibits IRAs from transacting directly with “disqualified persons” (as defined under Code Section 4975(e)(2)), and similar rules govern Self-Directed 401(K)s and other tax-advantaged savings vehicles.

What does this mean? In a nutshell, Sections 408 and 4975 prohibit IRAs from buying or borrowing from or selling or lending to any of these persons:

The account owner.
The account owner’s spouse.
The account owner’s direct descendants and ascendants or those of his or her spouse.
Anyone who serves the account owner in a fiduciary capacity and provides advice concerning the Self-Directed IRA or other retirement account.
Any entities controlled by any of the above.

This also means you cannot try to use your Self-Directed IRA to benefit yourself or your immediate family, any other prohibited counterparty, by taking a salary, hiring your son-in-law to manage a property, or pay finder’s fees or any other form of compensation to a spouse, parent, child, grandchild or any corporations or LLCs they control.

Penalties

The penalties for violating Self-Directed IRA prohibited transaction or prohibited counterparty laws are severe: You risk having the IRS disallow the favorable tax treatment of the entire account, potentially resulting in immediate income tax liability and any applicable penalties for early withdrawal if you are younger than age 59½ for IRAs.

American IRA is sensitive to the prohibited transaction issue. For that reason, every transaction we engage in on our clients’ behalf is reviewed for compliance with prohibited transaction and prohibited counterparty rules.

Many investors have found that besides enjoying the diversification benefit of alternative asset classes and opportunities for market-beating returns when stock markets are weak, they can also realize substantial savings in fees as a result of our simple, cost-effective fee-based menu of services.

With American IRA, you are not charged a high percentage of your assets under management even when you make few or no transactions. Instead, you pay only for the services you use, as you use them, transaction by transaction. By adopting a menu-based pricing system, American IRA, LLC routinely saves buy-and-hold investors thousands of dollars per year in AUM fees and commissions.

Though our offices are in Asheville and Charlotte, North Carolina, we serve successful, entrepreneurial and out-of-the-box thinkers all around the country.

Private Equity in Self-Directed IRAs – Due Diligence Tips

October 3, 2018/in Blog, Self-Directed IRA /by Jim Hitt

One of the many advantages of opening a Self-Directed IRA account with American IRA, LLC is the ability to allocate retirement resources to private equity opportunities. These tend to be early stage or turnaround opportunities that provide the potential for outsize returns and diversification against an increasingly overheated stock market. However, Self-Directed IRA owners should be prepared to absorb a good deal of risk, as well as accept the burden of conducting thorough due diligence.

Here are some of the most important concepts we have picked up from veteran investors in this space:

Do not be rushed. Professional private equity investors and venture capitalists can take entire days or weeks investigating an opportunity before actually investing. Self-Directed IRA owners should be willing to do the same. Even if the opportunity seems compelling at first, you should still take the time to verify promoters’ claims and check the accuracy of all the assumptions underlying the investment thesis.
Go big. When they do find a good opportunity, though, most successful private equity or venture capital investors like to commit a substantial sum of money. It takes so long to identify a good opportunity, and to thoroughly vet the opportunity and the management team, that when they do find a good investment, in or out of a Self-Directed IRA, they like to make it count!

It may be better to invest $1 million in your best five candidates than $50,000 each in the best 20.

Do not go it alone. Many of our most successful private equity investors and venture capitalists are active in clubs or networks of likeminded individuals. Members of these clubs often have loads of useful management, financial or technological knowledge or experience. They may well help expose you to some great opportunities.

Even more importantly, they may help dissuade you from investing your Self-Directed IRA money in bad ones.

Management counts. Even a great idea needs great leadership in order for the company to unlock value for investors. If they cannot provide that, they have no business soliciting investment from the capital markets in the first place. Find out what key managers have been doing over the past ten years. Do they have a track record of success? Is this their first venture? If so, who is helping them? Who is on the Board of Directors and what is their track record? Were their past successes in the same industry? Do any of them have rapsheets? Have they been barred from any industries by licensing bodies? What are they bringing to the table?
What strategic partnerships are in place already that may help the venture succeed? Is the Board of Directors cross-pollinated with other key industry players that can help the company succeed? Has the venture already attracted other veteran angel investors or others who can help the company succeed?
Are the financials and pro formas accurate and realistic? Many people have lost money by being too credulous of managements’ pie-in-the-sky assumptions and projections. Look at financial projections with a suspicious and gimlet eye.
What is the plan for return of capital? Any investment should have a realistic provision for the return of capital. Sometimes it may take years – in which case you should come armed with a long-time horizon and a lot of patience. But promoters and managers should be able to walk you through their plan from investment to exit.

Is it Possible to Make a Self-Directed IRA Contribution Without Earned Income?

October 1, 2018/in Blog, Self-Directed IRA /by Jim Hitt

As you probably already know, traditional individual retirement arrangements (IRAs) were created to provide working people with a tax-deferred vehicle for accumulating savings that will supply them with income after they retire. The Self-Directed IRA contributions are deducted from taxable earned income and effectively allow savers to postpone paying taxes on the contributions until they withdraw the money, typically after they retire.

If you have earned income in 2018, you can contribute up to $5,500 (or $6,500 if you are over 50) or the amount of your earned income, whichever is less. However, the rules that govern Self-Directed IRAs make a distinction between what qualifies as income and what does not. Qualified compensation comes in a variety of forms:

Wages
Salary
Tips
Professional fees
Bonuses
Commissions
Self-employment income
Alimony
Non-taxable combat pay

For Self-Directed IRA purposes, compensation does not include the following:

Earnings and profits from property (rental income or royalties)
Interest and dividend income
Pension or annuity income
Unemployment income
Social security
Income from certain partnerships

It would seem that without taxable compensation, you lose all eligibility for a direct Self-Directed IRA contribution. So, is there an option for stay-at-home parents, those on disability, or the unemployed? Or are they flat out of luck?

**The Self-Directed Spousal IRA is the exception**

If you do not have wages and are married, there is a way to make contributions to a Self-Directed IRA—with a Traditional or Self-Directed Roth Spousal IRA. These are retirement accounts that were created specifically to allow a working spouse to make contributions on behalf of a non-working spouse.

Here is how it works: If you are married filing jointly, you may contribute the maximum into a Self-Directed IRA for each spouse—even if only one of you has earned income—as long as the spouse that is working has enough income to at least equal both contributions.

For example, you and your spouse, both 45 years of age, want to contribute the maximum of $5,500 to each of your Self-Directed IRAs. The spouse who is working must have earned income of at least $11,000 to cover both contributions.

Self-Directed Spousal Roth IRAs work the same way except that there are income limits on contributions. For 2018, married couples filing joint tax returns have the amount they can contribute phased out when their modified adjusted gross income is between $189,000 and $199,000.

One thing to remember about the Self-Directed Spousal IRA is that if the non-working spouse goes back to work, he or she can contribute to the same Self-Directed IRA. Once it is opened, a Self-Directed Spousal IRA is an Individual Retirement Account like any other.

So, even if you cannot contribute directly to your Self-Directed IRA, a Self-Directed Spousal IRA can make it possible to have money set aside for your retirement in a tax-advantaged account.

Get the most from your portfolio with a Self-Directed IRA

At American IRA, we believe that Self-Directed IRA investing is the key to a prosperous retirement. In today’s financial environment you need the versatility and power of a Self-Directed IRA to provide you with additional returns for your portfolio–over and above conventional assets such as stocks, bonds, mutual funds, annuities and the other common assets you keep hearing about.

Investment options include:

Self-Directed Real Estate IRA
Private IRA Lending
Tax Lien IRA
Privately Held Companies
Precious Metals IRA
and much more…

How your Self-Directed IRA May Relieve Personal Stress?

September 28, 2018/in Blog, Self-Directed IRA /by Jim Hitt

Unless you are already retired, you are currently looking forward to the time when you will be able to retire. No matter how close or how far off in the distance that time may be, you have at least one choice to make. That choice should be made sooner rather than later. Having a Self-Directed IRA may be the right choice for your future.

Chances are that you, along with most people, have not thought about it like this. You can either plan for your eventual retirement, or you can become stressed out thinking about it. If you have the right plan in place or can develop the “right” plan for yourself, you will reduce, if not eliminate, the stress part.

And, yes, having a Self-Directed IRA in place can be an important cog in your plan. We do not have the choice of having each day bring us one more day closer to retirement.

The recent study by the American Psychological Association, based on more than 3,400 interviews, shows that more than 62% of Americans are stressed about money. What we do not know is how many of those have a plan for retirement already in the works.

Those that have a higher stress level, whether money related or not, tend to have more health issues and/or might not be able to perform to their capabilities. This is where a Self-Directed IRA can help reduce stress levels when it comes to thinking about your retirement.

Merely having a Traditional IRA or 401K in place might not be the entire solution for you. Even with the benefit of employer matching, the majority of these plans only allow investments which are approved by the entity which manages your plan. It is likely that you have a broker or a representative designated to handle your account along with potentially hundreds of others in the same way. They help all of their clients to gradually grow their portfolio with limited choices.

You no longer have to rely on a broker assigned to you for your retirement decisions.

It is easy for a lot of us to set aside important tasks which do not have to be acted upon right away, especially one that we perceive as not being important until many years from now.

When it comes to your retirement planning, an important step you can take right away is to treat it as an immediate task.

Suppose you set aside one hour this week to devote to your retirement planning. One hour at any time of the day or night. You do not need to hire or consult with a broker or trader or go anywhere beyond your front door.

Starting or focusing on your own Self-Directed IRA is your first step. The beginning process generally takes no more than 30 days. Your funding can come from an existing IRA or 401K or can be started from contributions from your personal cash on hand.

Your personal retirement plan should be based on factors such as number of years before your anticipated retirement and your personal interests or expertise.

Having your Self-Directed IRA allows you to invest in everything from real estate to precious metals to private equity as you see fit.

Suppose you have at least 20 years before your likely planned retirement age.

The first step you take is to stop thinking that you do not have to worry about this for at least 10 years. Instead, start planning how much you plan to grow your retirement funds over the next 10 years. Think about what you need to do over the next 10 years in order to not have to work another 10 years after that.

If this is your situation, you have the ability to explore long term opportunities in an area you are knowledgeable about and/or have experience in, such as real estate.

Perhaps you could explore investing in a rental property or residential or commercial land. You can take the time to research and find one or more property deal which has long term potential.

Establishing a positive cash flow from a rental property is a path to being able to acquire more rental properties, such as one each year. If you were to accomplish this with your first rental in the next two years, it would mean that 12 years from now you would own at least 10 rental properties, each of them generating monthly cash into your Self-Directed IRA.

Suppose you only have five years before your planned retirement age. Using the same strategy, you could research to find a property to “flip” using your Self-Directed IRA. This is where you purchase at a discount and are able to sell at a much higher price. You could then take at least a portion of your profit and invest in another “flip”, potentially growing your funds more quickly than the “one rental property per year” strategy.

Either way, by utilizing this method, you are taking control of your retirement income and working toward a goal of not having to wait as long as you first thought.

This changes your perspective on “20 years from now”. At the same time, it significantly reduces your overall stress level. It begins with your Self-Directed IRA.

How is a Self-Directed IRA Taxed?

September 26, 2018/in Blog, Self-Directed IRA /by Jim Hitt

You might have heard someone talk about their tax-free Self-Directed IRA at some time or another. Just to set the record straight, Self-Directed IRAs are arguably one of the finest vehicles for accumulating funds for retirement that anyone has ever devised. And while there are many benefits to opening one and contributing to it, freedom from taxes is not one of them.

It does not matter what type of Self-Directed IRA you choose; you will eventually pay taxes on it. You cannot decide if you will pay taxes, but you can decide when you will pay them. Some people prefer to pay up front, thinking that perhaps their tax rate will be higher at retirement. They choose to go with a Self-Directed Roth IRA.

Others take their tax write-off now and defer paying their taxes until the funds are distributed at retirement. Many of these folks believe their tax rate will be lower when they retire, so they are content to wait until then to pay up. They pick the Traditional IRA, and it is usually these Self-Directed IRA investors who mistakenly call them tax-free when what they mean is tax-deferred.

While no one should invest solely on tax advantages, it is a good idea to know the difference in how each type of Self-Directed IRA is taxed before you open an account. Here is the rundown on how each Self-Directed IRA—Roth and Traditional—is taxed so that you can decide which one makes the most sense for you.

You pay upfront with a Self-Directed Roth IRA

Self-Directed Roth IRA contributions are made with after-tax dollars. Unlike a Traditional IRA, you do not get to reduce your income—and your tax bill—by the amount you contribute. Your benefits come at retirement when you get to withdraw your funds without owing any taxes.

Another enticing benefit is that you can withdraw the earnings on your account without taxes. If you started contributing when you were young, those earnings could be quite sizable. Add in the money you will have saved if your tax bracket or rates increased by the time you retire, and it amounts to a big advantage for going with the Self-Directed Roth IRA.

The rules for withdrawing funds from a Roth are more liberal than for a Traditional IRA, but depending on certain factors, you might end up paying some taxes on your distribution.

**Your Self-Directed Roth IRA withdrawals could be taxed**

Generally, you can withdraw an amount equivalent to the contributions you made to your Self-Directed Roth IRA at any time without tax or penalty. Where it gets complicated is when your withdrawal includes some of your account’s earnings, such as dividends, interest, and capital gains.

If you withdraw funds after you turn 59 ½, your contributions are not taxed. Your earnings are also free of taxes as long as the Self-Directed Roth IRA has been established for at least five years.

If you make the withdrawal before age 59½ and it does not exceed the amount that you contributed over the years, there is no income tax due.

If you make the withdrawal before age 59½ and it includes earnings, you might have to pay both income tax and a 10% penalty on the earnings portion. There are exceptions: Funds can be distributed for higher education expenses or to buy a home. And if there is a hardship, such as permanent disability, you can withdraw your funds tax- and penalty-free.

You can defer taxes with a Traditional IRA

The rules are substantially different for a Traditional IRA. You are essentially funding it with pre-taxed earnings because you can deduct the amount of your contribution from your income, which defers the taxes you owe on it until you take a distribution at retirement. At that time the tax must be paid on both the contributions and the accumulated earnings.

Withdrawals from your Traditional IRA before age 59½ will result in a 10% federal penalty tax plus regular income tax on the entire withdrawal. If you make withdrawals between ages 59½ and 70½, you will owe taxes on the earnings and any contributions you originally deducted from your taxes, but there are no penalties.

With a Traditional IRA, you are required to take your first required minimum distribution (RMD) by April 1st of the year following the year you reach age 70½. After that, you must take your RMD by December 31. The RMD amount is based on your life expectancy and the value of your account. There is no RMD for a Self-Directed Roth IRA.

How Can your Self-Directed IRA Help the Environment?

September 24, 2018/in Blog, Self-Directed IRA /by Jim Hitt

You might wish to consider an eco-friendly investment for your Self-Directed IRA, especially when looking at the long term. Thinking green can make you some “green”, as in cash, if you can find the right opportunities.

Businesses which demonstrate a commitment to “environmental responsibility” are now expected to outperform those which do not over the next 20 years. The recent study published by the Harvard Business Review confirms this, citing that the “aware” businesses will be prepared well ahead of possible new regulations as well as civic pressure.

Even if you have designated your Self-Directed IRA for real estate investing, you have this opportunity. This could include raw land which could be used for solar panels, wind turbines, nuclear energy, and/or existing energy efficient properties.

Such properties, whether residential or commercial, could bring added appeal to buyers that are already environmentally conscious. Wind turbines are also an eligible investment, with or without owning the land they occupy.

There is also what are commonly known as “Green Bonds”. These are used by municipalities and appropriate organizations to assist with the development of sites and projects with energy efficiency, protection of ecosystems, sustainability, and prevention of pollution.

However, eco-friendly investments through your Self-Directed IRA are not limited to real estate. You could also invest in “green” technology, such as hydro-technology.

Technology investments could include electric and/or fuel-efficient cars and other motor vehicles, as well as trains and other modes of transportation, including bicycles. Garbage and recycling are other areas which are faced with the challenges of serving in a cleaner environment in years to come.

Finding a unique opportunity for investment with your Self-Directed IRA could turn into a family project, especially with the variety of categories which can be explored.

You could, for example, enlist the help of your children, nieces, nephews, and/or trusted family members to research categories of interest to them.

There are several student organizations which take up environmental causes and may be able to provide information about entities which are leading the way. You could then research the companies with an eye toward investment possibilities, whether with those companies or a form of their competition.

One category is called MHK, which is marine and hydrokinetic technologies. These are used to convert the energy from tides, waves, and river and ocean currents into electricity. The U.S. Department of Energy has a partnership with International Energy Agency Ocean Energy Systems, which has created a database known as Tethys. This database contains research data about the potential impact of offshore wind and MHK on the environment around the world.

Although this information appears confusing to many of us, it is this type of research which serves to uncover opportunities for long term investors, especially when a Self-Directed IRA allows you to have such a possibility.

Another category to consider is Geothermal Energy, which is actually heat from the earth. Sources are hot water or steam reservoirs which are accessed by drilling in locations such as Alaska and Hawaii, where the shallow ground under the surface is able to maintain consistent temperatures in the 50 to 60-degree range. The steam can be used to drive generators and produce electricity, while the heat from the ground could impact heating or cooling for agricultural and industrial use.

On the automotive side, there are opportunities involving Hydrogen. When combined with oxygen in a fuel cell, Hydrogen produces heat and electricity. However, it needs to be produced from other sources of energy. A recent U.S. Government report shows that technology is needed to transport and/or store it. Development is reportedly in the early stages to be able to make Hydrogen from renewable energy sources.

The point is that there are numerous possibilities for long term eco-friendly investments through your Self-Directed IRA. You have the ability to do your own research on your own time, and not be forced to share your findings with others if you do not wish to do so. This could be your method to becoming a “private investor” by finding the right opportunity for you. Your Self-Directed IRA allows you these and many other possibilities for your long-term investments.

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The Self-Directed Spousal IRA is the exception

Your Self-Directed Roth IRA withdrawals could be taxed

Generally, you can withdraw an amount equivalent to the contributions you made to your Self-Directed Roth IRA at any time without tax or penalty. Where it gets complicated is when your withdrawal includes some of your account’s earnings, such as dividends, interest, and capital gains.

If you withdraw funds after you turn 59 ½, your contributions are not taxed. Your earnings are also free of taxes as long as the Self-Directed Roth IRA has been established for at least five years.

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**The Self-Directed Spousal IRA is the exception**

**Your Self-Directed Roth IRA withdrawals could be taxed**